Tax hikes for businesses are “inevitable” as Democrats seek to pay for the infrastructure and healthcare upgrades they seek, Morningstar’s head of policy research Aron Szapiro predicted.
In fact, the veteran analyst puts the odds of new corporate taxes this year at 80%.
“Democrats hold a razor-thin majority in Congress, along with their control of the White House. And it's unlikely their plans will get any support from Republicans. Still, despite the narrow majority, the chances of a major tax package falling apart is not that high,” Szapiro said in a new blog. “We think there's about an 80% probability that it passes, and we'll keep refining that number as Congress considers the plans.”
Democrats’ infrastructure wishlist—which includes major investment ranging from broadband, rail, sewer and water systems, renovated childcare facilities and an expansion of the Affordable Health Care Act and the child tax credit, cost a lot of money.
Morningstar estimates that simply extending the major tax provisions in the recently passed Covid-relief package would reduce federal tax revenue by around $1.6 trillion over 10 years, Szapiro said.
The American Rescue Plan Act of 2021 created larger subsidies for health insurance premiums, a more generous child tax credit and an expanded earned-income tax credit. Now, President Joe Biden has proposed another $2.25 trillion in infrastructure spending.
“Democrats may decide that they don't need to pay for all this spending immediately—particularly one-time, once-in-a-century infrastructure upgrades. But they will certainly feel the need to pay for a lot of it. We think that could amount to a tax increase of about $2 trillion over the next 10 years,” Szapiro said.
President Biden’s bid to secure bipartisan support for his $2.25 infrastructure package is off to a rocky start. Sen. Joe Manchin (D-W.V.) and some other moderate Democrats think the corporate tax increase, which would raise corporate taxes from 21% to 28%, goes too far, creating a competitive disadvantage for U.S. companies battling to compete with China and other nations, which have a 25% corporate tax rate.
Sen. Chris Coons (D-Del.), a close Biden ally, told reporters yesterday that one month has been set aside to hammer out a deal with Republicans. But even moderate Republicans think the tax hike will hurt corporate competitiveness.
Szapiro and others believe they won’t need Republican votes, however. In the Senate, Democrats are expected to use budgetary rules that would allow them to move the package with no Republican votes. Under budget reconciliation rules, the package could avoid a Senate filibuster. That’s how Biden won quick approval of the $1.9 trillion Covid relief package without any GOP support.
“Simply put, Democrats have unified control of government for the first time since 2010, and they agree that they should use their majority to make large changes to American public policy while they have it,” Szapiro said.
To pay for those large changes, Democrats have only so many options for raising revenues. “While we think Democrats will probably increase income taxes for top earners later in the year, any major or new taxes will mostly be focused on increasing the taxes that businesses pay. There are two reasons: politics and cold, hard math,” he added.